The Sausage Hut is looking at a new sausage system with an installed cost of $187,400. This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $25,000. The sausage system will save the firm $69,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $9,000, which will be recouped at project end. If the tax rate is 34 percent and the discount rate is 12 percent, what is the NPV of this project?

$6,508.54

Explanation:

Calculation for what is the NPV of this project

First step is to calculate the operating cash flow (OCF).m

Operating Cash Flow = $69,000 (1 - .34) + ($187,400 /4)(.34)

Operating Cash Flow = $69,000 (0.66) + ($46,850)(.34)

Operating Cash Flow=$45,540+$15,929

Operating Cash Flow= $61,469

Now let calculate the Net present value (NPV)

Net Present Value= -$187,400 -9,000 + ($61,469 ×{1 - [1 / (1 + .12)^4]} / .12) + {$9,000 + [$25,000 × (1 - .34)]} / (1 + .12)^4

Net Present Value= -$187,400 -9,000 + ($61,469 ×{1 - [1 / (1.12)^4]} / .12) + {$9,000 + [$25,000 × (0.66)]} / (1.12^)4

Net Present Value= -$187,400 -9,000 + ($61,469 ×{1 - [1 / 1.57]} / .12) + {$9,000 + $16,500)]} / 1.57

Net Present Value= $6,508.54

Therefore the the NPV of this project will be $6,508.54

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